The role of credit in regional divergence: Spanish regions and Eurozone countries

Sheila C Dow,Carlos J Rodríguez-Fuentes

doi:10.1590/0101-31572020-3051

Sheila C Dow, Carlos J Rodríguez-Fuentes

Open Access

https://doi.org/10.1590/0101-31572020-3051

Copy DOI

Abstract

ABSTRACT This paper provides a theoretical account of the role of regional differences in cyclical patterns of credit availability for patterns of regional convergence or divergence. While mainstream theories imply either equalising regional capital flows, or else lower credit availability for peripheral regions due to market imperfections, Post-Keynesian theory of liquidity preference and financial structure imply the scope for greater credit volatility for peripheral regions, especially in downturns, contributing to real economic divergence. This latter account is assessed by means of an empirical analysis of patterns in bank credit over the business cycle among the Spanish regions and Eurozone countries.

Highlights

There is growing empirical evidence that the establishment of EMU has not led to greater economic convergence within the euro area (Martin, 2001; Fingleton, Garretsen and Martin, 2015, and Cuadrado-Roura, Martin and Rodriguez-Pose, 2016)
The financial crisis has made the scope for divergence in real economic conditions and credit availability increasingly evident (Martin, 2011, and Dijkstra, Garcilazo and McCann, 2015)
O’Brien’s “end of geography” claim for finance implies that, since credit instability was so widespread during the crisis, it is of little spatial consequence (Martin, 2011: 590)

Summary

INTRODUCTION

There is growing empirical evidence that the establishment of EMU has not led to greater economic convergence within the euro area (Martin, 2001; Fingleton, Garretsen and Martin, 2015, and Cuadrado-Roura, Martin and Rodriguez-Pose, 2016). The effect we would expect is that, far from enhancing integration of peripheral regions into the national financial sector and enhanced access to credit, the process of centralisation has exacerbated the problems of less reliable information on peripheral borrowers and the value of peripheral assets In the case both of the Spanish regions and the members of the Eurozone, Post-Keynesian theory would suggest a greater pro-cyclical volatility of credit levels in peripheral economies over the business cycle, compared to steady growth in the centre, and a secular tendency for lower credit growth. This contrasts with the prediction of traditional mainstream theory, that regional credit supply would be counter-cyclical, following heightened marginal returns and encouraged by regional policy.

Ultra Core

Findings

CONCLUSIONS